Mutual Fund : Top 10 Reasons Why should You invest

A Mutual Fund scheme is a type of financial instrument which is made by a pool of money collected from many investors. The AMCs invest in securities like company shares, bonds, stocks, debts, and other assets by mutual fund companies. The AMCs manage these open-ended investments. Mutual fund companies allocate the fund in different securities. This helps its investors to grow their wealth through their investments.

If you are new to the world of mutual fund investing, let us look at some of the key benefits of mutual funds that make them an ideal choice for investors.

Advantages and benefits of investing in Mutual Funds in India

1. Diversification

One of the most prominent advantages of investing in mutual funds is diversification. It is the process of spreading a given investment over multiple assets classes. Diversification helps us create an assorted portfolio that segregates the headwinds experienced in various sectors. Money is invested in a mixture of assets according to one’s risk appetite.

For e.g., an equity-oriented mutual fund would generally comprise of 60-70% investments in equities, and the remaining 30-40% in debt securities.

2. Liquidity

The most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawal but factors like the pre-exit penalty and exit load should be taken into consideration.

3. Professional management

When you invest in mutual funds, you may quit worrying about where and how to invest. Let your fund managers take a call based on thorough market research, monitoring and experience.

The expert keeps a watch on timely exit and entry and takes care of all the challenges. One only needs to invest and be least assured that rest will be taken care of by the experts who excel in this field.  This is one of the most important advantages of mutual funds

4. Higher Return on Investment (RoI)

All investors aim to achieve a higher RoI by investing in financial instruments such as mutual funds to beat inflation and increase their wealth of the long-term. Mutual funds have greater prospects of potentially providing highreturns over time as one can invest in a diverse range of sectors and industries.

5. Tax Benefits

The tax benefits associated with a particular kind of mutual fund is perhaps what draws most investors to this investment vehicle. To encourage investments in mutual funds, the Government of India offers several tax benefits.

For e.g., investments in Equity-Linked Saving Schemes (ELSS) qualify for tax deduction under Section 80C of the Income Tax Act. One can invest up to Rs1.5 lakh in this instrument to avail a tax saving of approximately Rs46,800 (assuming the highest slab of income tax i.e. @30% plus health & education cess 4% excluding surcharge as applicable) on their taxable income. The only caveat here is that the instrument comes with a lock-in period of 3 years, which means that you would not be able to access the invested funds during this period.

6. Easy To Investment

You can invest in mutual funds either directly or through a financial advisor. A mutual fund allows you to start with small investments. For instance, a SIP lets you invest small amounts of money (as low as Rs. 500) at regular intervals – helping you achieve your financial goals through disciplined and systematic investing.

7. Well-regulated

All mutual funds are regulated by the capital markets watchdog Securities and Exchange Board of India (SEBI). This means that all mutual fund houses are required to follow the various mandates as laid down by SEBI. This, in turn, protects the interests of the investors. Moreover, SEBI makes it mandatory for all mutual funds to disclose their portfolios every month.

8. Safety and Transparency

With the introduction of SEBI guidelines, all products of a Mutual Fund have been labelled. This means that all Mutual Fund schemes will have a color-coding. This helps an investor to ascertain the risk level of his investment, thus making the entire process of investment transparent and safe.

This color-coding uses 3 colours indicating different levels of risk-

Investors are also free to verify the credentials of the fund manager, his qualifications, years of experience, and AUM, solvency details of the fund house.

9. Lower cost

In a Mutual Fund, funds are collected from many investors, and then the same is used to purchase securities. These funds are however invested in assets which therefore helps one save on transaction and other costs as compared to a single transaction. The savings are passed on to the investors as lower costs of investing in Mutual Funds.

Besides, the Asset Management Services fee cost is lowered and the same is divided between all the investors of the fund.

10. Lower Tax on the Gains

With Equity linked saving scheme you can save tax up to Rs. 1.5 Lakh a year under section 80C of Income Tax (IT) Act. All other types of Mutual Funds are taxable depending on the type of fund and tenure.

Before making an investment one should keep in mind the various advantages Mutual Fund provides. Thorough knowledge of the benefits of Mutual Funds would lead to better gains in the future.

Do you want to save tax ? Read me

Now that we know the advantages of mutual funds, let us now compare Mutual Funds with other investment options

Mutual Fund Vs Public Provident Fund (PPF)

Parameters	PPF	SIP
Returns	7.1% (Q1 of FY 2021-22)	*Market linked
Investment Instrument	A part of Government borrowings and installed as per govt. requirements	Mutual Funds
Investment Amount	Minimum- Rs. 500 | Maximum- Rs. 1.5 lakh p.a	Minimum Rs.500 per month | No max. limit
Investment Tenure	15 years (minimum) | Extendable in blocks of 5 years	Can be as low as 6 months or as high as 20 years
Lock-in Period	15 years	No lock-in period
Investment Risk	It is a government-backed scheme. Hence, completely secure	Risky as SIP is market-linked
Tax Benefits	EEE (Exempt-Exempt-Exempt) category of tax	Depends on the type of Mutual Fund. Ex: ELSS is eligible for tax deduction under Section 80C
Liquidity	Low | Withdrawals allowed only from 7th financial year of investment	High | Investments can be redeemed at any point in time

Mutual Fund Vs NSC

Parameters	ELSS	NSC
Nature	Mutual funds investing in equity markets.	Small Savings Scheme
Lock-in period	3 years	5 years
Taxation	Deduction under Section 80C of up to Rs. 1.5 lakhs. LTCGs- 10% Tax on returns above Rs.1 lacs.	Deduction of up to Rs. 1.5 Lakh per annum Section 80C.Interest taxable.
Risks Associated	Moderate to High	Risk-free
Returns	12-15% (expected) on long term investments	6.8% compounded annually

Mutual Fund Vs Fixed Deposit (FD)

Parameters	FD	Mutual Funds
Safety	Very safe (subject to financial strength of the bank).	Mutual funds are subject to market risks. Different types of schemes have different risk profiles. Invest according to your risk appetite.
Liquidity	Medium to Highly liquid. Penalties may apply on premature withdrawals	Open ended funds are highly liquid. Exit load may apply for withdrawals within a certain period from the date of investment
Returns	Assured returns	Market linked. Historical returns track record of top performing funds across categories is strong
Taxation	As per income tax slab of investors	Long term capital gains tax advantage. If you compare debt fund vs fixed deposit, Indexation benefits in debt funds makes it more tax friendly for investors in higher income tax slabs
Investor interest protection	Regulated by RBI	Regulated by SEBI

However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.

In a nutshell we summaries that Mutual funds aid you in realizing your life’s superior goals quite easily. In this video, we go through the different benefits of mutual funds that investors can capitalize on to grow their corpus and meet their financial goals.

# The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme

# Investing in mutual fund is associated with Market risk